Derivatives Surge Amidst a Flat Equity Market
- We keep our NEUTRAL call and trim our TP to SGD7.58 (8% downside, from SGD7.88).
- FY15 (Jun) results were in line with our and consensus expectations.
- The 110% YoY surge in 4QFY15 derivative contracts traded contributed to earnings growth. 4QFY15 securities market average daily turnover (ADT) was up 6% YoY to SGD1.2bn.
- We lower our FY16F net profit by 6%, mainly due to higher expected FY16 expenses – which resulted in a TP downgrade.
- 4QFY15 results were in line, with net profit of SGD96.2m (+24% YoY), bringing FY15 net profit to SGD349m (+9% YoY).
- Derivatives the star performer. Singapore Exchange’s 4QFY15 securities turnover velocity of 37% was higher than 4QFY14’s 35%. 4QFY15 derivatives contracts traded numbered 53.2m, jumping 110% YoY (+36% QoQ), mainly driven by China A50 Index futures (48% share of derivative contracts traded). Overall 4QFY15 revenue rose 25% YoY.
- Operating expenses rose 25%. 4QFY15 operating expenses rose 25% YoY to SGD105m. The rise in expenses was attributed to increasing staff costs and higher royalties, in line with derivatives volume growth. Management guided for FY16 expenses of SGD425-435m, which is ~14% higher than FY15’s SGD377m. We consequently raised our assumptions on its FY16 expenses.
- Dividend. It declared a final DPS of 16 cents (4QFY14: 16 cents). FY15 DPS of 28 cents (FY14: 28 cents) represents a payout ratio of 86% (FY14: 93%), while its dividend yield is at a respectable 3.4%. For FY16, Singapore Exchange will raise the base quarterly DPS to 5 cents, and have an annual payout ratio of not less than 80%.
- Valuation and recommendation. Factoring in the stronger derivatives volume, we forecast FY16 net profit to grow 4% YoY. Our TP of SGD7.58 is based on a target FY16 P/E of 22x (10% discount to its 5- year average P/E of 25x) to reflect the volatile securities market conditions. If one is more bullish and assumes FY16 ADT of SGD1.40bn (20% more than our assumption), then its TP would rise to SGD8.35 – and even in this optimistic scenario, the share price upside is < 10%.
(Leng Seng Choon CFA)
Source: http://www.rhbgroup.com/
